Investors more sceptical on funds’ sustainable credentials

Greater levels of cynicism come at a time when short-term performance has taken a turn for the worse.

Investors are becoming more sceptical of the sustainable or environmental, social and governance (ESG) investment claims made by fund management firms, according to research by the Association of Investment Companies (AIC) and Research in Finance.

A study of 402 investors found that 58% of respondents are not convinced by the sustainable claims from funds, up 48% from last year. Of those who do not consider investing sustainability, 55% said they were not convinced, up from 27% in 2021. 

The survey also found that investors have become more pessimistic regarding the ability of sustainable or ESG funds to add value to returns. Just over one in five (22%) said they think ESG investing is more likely to improve performance compared to one in three (33%) a year ago.

• Explore our: Sustainable Funds List | Top Investment Trusts  | Transferring an Investment Account

Greater levels of cynicism come at a time when short-term performance has taken a turn for the worse. This is due to the market rotation that’s played out on the back of high inflation and rising interest rates, which has benefited value shares at the expense of growth shares.

Technology and other growth shares have their more expensive valuations hinged on their future earnings potential. Such companies are negatively impacted by high inflation and interest rate rises because both devalue their expected future earnings.

Sustainable funds tend to favour technology stocks due to their lower carbon footprints and the social good they often provide, such as clean energy technology, access to education resources or medical breakthroughs.

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Richard Stone, chief executive of the AIC, said: “Our research inevitably reflects the changed investment climate over the past 12 months, but it also carries an important message for the investment industry and for regulators.

“Trust is absolutely essential for ESG investing to grow and thrive. Investors need to have confidence in the claims made by investment products, and that in turn requires a clear and rigorous approach from the regulator – including, for example, robust and stringent requirements for a fund to be able to call itself sustainable.”

The risk of ‘greenwashing’

When sizing up sustainable funds, investors need to be wary of ‘greenwashing’. This is a term that describes asset managers pushing themselves or their funds as ‘green’ through marketing, rather than fully integrating ESG and sustainability in their investment processes.

Take a look at our 10-point checklist for fund and investment trust investors who want to avoid potential greenwashing.

How to find sustainable funds 

While the terminology can be confusing, the fundamental principle of sustainable investing (or however it is labelled or described) is supporting businesses ‘doing good’ by making a positive impact on the planet.

To help investors navigate confusing technical jargon, interactive investor launched the ii sustainable long list in September 2019, which is made up of more than 200 socially responsible and environmental funds, investment trusts and ETFs available on our platform.

We also launched the ACE 40, a rated list of sustainable investment funds for retail investors wanting to better align their investments with their personal values. All ACE 40 investments are categorised into one of three broad sustainable investment ‘styles’ to help investors find a fund that meets their values. The three categories are Avoids, Considers and Embraces and you can find out more about them here.

There is also the ii Ethical Growth portfolio, which is designed to give investors ideas about how they can build their own diversified portfolio.